The Coronavirus, Commercial Real Estate and REITs

*Updated April 3*

With everyday life upended by the coronavirus for the foreseeable future, the commercial real estate industry is shifting on a daily basis. As patterns of life change for residents, customers, workers, patients, and travelers, Nareit is staying on top of the news you need to continue running your business during this tumultuous time. The page will be updated frequently with what you need to know about coronavirus as it impacts REITs and real estate today. Our REITs in the Community page highlights what REITs are doing to assist their tenants and communities in this trying time.

April 3:

mREIT Executives Shed Light on Recent Market Volatility
In recent weeks, the mREIT sector has borne a disproportionate amount of liquidity-driven market turmoil triggered by the coronavirus crisis. With conditions showing signs of settling, for now, several Nareit mREIT members took a step back to give a first-hand account of what their companies have been dealing with.

REITs Should Prepare for Possibility of Increased Activist Investor Interest Following Crisis
REITs need to take a proactive stance to ensure they are ready to deal with activist investors that could emerge in the wake of the current coronavirus market uncertainty, according to a REIT corporate governance expert. John Haggerty, co-chair, public M&A/corporate governance at Goodwin, told an April 2 webinar that activist investors see increased buying opportunities in the current environment “and are sitting on a lot of cash that has long-duration lockup, so they’ve got it there to use.”

Calvin Schnure Interview on TD Ameritrade Network
Nareit senior economist Calvin Schnure joined the TD Ameritrade Network to discuss this morning’s payroll report and the impact of COVID-19 on employment in the U.S.

Podcast: Leadership Skills Under Close Scrutiny During Periods of Crisis
The latest edition of the REIT Report podcast featured Walt Rakowich on the topic of leadership during a time of crisis. Rakowich became CEO of ProLogis at the height of the economic downturn in 2008 and restored the company’s finances, enabling it to merge with AMB Property Corp. in 2011 to create Prologis, Inc. Rakowich noted that while every crisis is different, "how and why we lead is actually quite consistent."

April 2:

Lessons from the Global Financial Crisis for the Coronavirus Crisis: Public and Private Real Estate
As the market adjusts to the COVID-19 pandemic, it’s important to keep in mind some of the lessons from the global financial crisis (GFC)—in this case, the lead/lag relationship between REITs and unlisted (or private) real estate. REIT share prices react in real time to market conditions while shocks to private real estate valuations are revealed over time as a result of reporting lags.

April 1:

REITs and Real Estate Related Economic Data to Watch for During the Coronavirus Crisis
So far there have been few reports with hard data on the economic impact of social distancing measures, the most notable exception being the spike in weekly jobless claims to a record 3.28 million in mid-March. Several important data releases are scheduled in the coming weeks. Here’s what to watch.

March 31:

STORE Capital Sees Rebound in Middle Market Following Coronavirus Crisis
STORE Capital Corp. President and CEO Chris Volk said the industries represented in the net lease REIT’s portfolio will remain relevant in the aftermath of the coronavirus crisis. Speaking on a March 31 investor call hosted by Raymond James, Volk added that “as the recovery ensues, the middle market will be rebounding strongly and there’ll be amazing opportunities for STORE to grow.” Volk also noted that STORE’s strong capital base will enable it to withstand the current crisis.

March 30:

$2 Trillion Coronavirus Rescue Package Signed into Law
The relief package includes a vast pool of grants and loans for small businesses, a large expansion of unemployment insurance, new resources to help strained state, local, and tribal governments as they combat this pandemic, funding for affordable housing and homelessness assistance programs, and access to Federal Reserve facilities and programs expected to be leveraged up to $4 trillion for loans, loan guarantees, and purchases of other interests of businesses and others experiencing economic distress during the crisis.

REITs’ Liquidity Resources Will Help Sector Face Coronavirus Challenges Ahead
In the March 30 edition of the REIT Report podcast, Nareit Senior Economist Calvin Schnure highlighted the latest developments in how the coronavirus crisis is impacting the economy and commercial real estate.

Three-day Rally Reduces Recent REIT Losses
Every REIT property sector posted double-digit gains last week. Some of the sectors that had recorded larger declines in the prior two weeks were up 20% or more. The FTSE Nareit All REITs index had a total return of 16.45%, compared to 10.64% for the Russell 1000.

March 27:

Strong Pre-Crisis Real Estate Fundamentals Will Help Sector Navigate Current Volatility
CBRE Chief Global Economist and Head of Americas Research Richard Barkham and CBRE’s Head of Occupier Research, Americas, Julie Whelan, joined the REIT Report to talk about the economy, commercial real estate, and the impact of the coronavirus pandemic. Barkham described the economic impact as “brutal in the short term,” with GDP in the United States likely to contract by 6.3% in the first quarter and 20% in the second quarter. If new COVID-19 infections begin to fall by mid-to-late April, and lockdown situations start to ease from mid-May, “we’re looking to an improved second half and a very strong 2021,” he said.

Nareit’s Calvin Schnure on COVID-19’s Impact on REITs and What’s Next
Calvin Schnure spoke with Commercial Observer to discuss what’s unfolded and how equity and mortgage REITs have been impacted by today’s economic fundamentals.

March 26:

Mortgages, MBS Face Challenges During Coronavirus Crisis
The economic and financial impacts of the COVID-19 crisis are affecting mortgage markets today in several ways. Many investors have sought to shed risk exposures across all asset classes. This has put pressure on prices and liquidity in markets for mortgage backed securities (MBS). In addition, the likelihood that some homeowners may delay or miss their mortgage payments has raised concerns about credit risk in mortgage investments.

Columbia Property Trust in "Good Shape" to Handle Economic Slowdown
In a conference call with SunTrust Robinson Humphrey, Columbia President and CEO Nelson Mills said, "for the next year or two we think we’re in good shape, and we can handle even more of a prolonged downturn—we’ve got some room there."

Nareit Senior Economist on Latest Unemployment Report
Nareit Senior Economist Calvin Schnure: "The record 2.38 million initial jobless claims last week is just the first of many reports that will show the impact of the coronavirus on the economy. The federal stimulus package and Federal Reserve support for financial markets come at a critical moment."

March 25:

Nareit Senior Economist on Bloomberg Radio
Nareit Senior Economist Calvin Schnure spoke on Bloomberg Radio's "Balance of Power with David Westin" about his latest economic outlook in the wake of COVID-19, the impact on commercial real estate, and the differences between the current economic situation and 2008.

What Resources Will REITs Need To Navigate the Coronavirus Crisis?
The main question today is how long the phase of rapid growth of infection and the economic shutdowns necessary to contain it will last. Previously there was a plausible case that these would be measured in weeks. It appears increasingly likely that it will spill into months.

Mortgage REITs, CMBS Markets and the Fed
Growing concerns about the impact of the coronavirus on the economy have caused severe liquidity issues in some asset classes. One of the asset classes that has exhibited significant illiquidity has been agency Commercial Mortgage Backed Securities or agency CMBS.

EPR Properties Anticipates Post-Crisis Rebound in Leisure and Recreation Demand
EPR Properties CEO Greg Silvers he expects to see a surge in demand for out of home leisure and recreation experiences in the wake of the COVID-19 pandemic.

March 23:

Congress Continues to Work on COVID-19 Economic/Health Care Relief Measure
Senate negotiators and Treasury Secretary Steven Mnuchin have been working on an agreement that would help blunt the economic fallout of the coronavirus crisis.

All REIT Sectors Hit With Stock Dip
Conditions worsened significantly over the past week, both in terms of the expected economic impact of the disruptions to activity in response to the virus, and also in stock market returns.

Federal Reserve, Treasury, FHFA Address Financial Ramifications
The Federal Reserve, Treasury and the Federal Housing Finance Agency of FHFA—which regulates Fannie and Freddie—have taken dramatic steps over the past week with the goal of addressing the financial market ramifications of the dramatic reduction in real activity.

Ultimate Economic, Financial Impact of COVID-19 Unclear Until More Progress on Public Health Front
In the latest edition of the REIT Report podcast, Nareit Senior Economist Calvin Schnure said the ultimate economic and financial impact of COVID-19 will be unclear until there is more progress on the public health front. Authorities, meanwhile, are acting quickly to support the economy, including the resurrection of the Federal Reserve’s crisis programs, Schnure noted.

Nareit Joins with Other Groups Asking the Treasury Department for Temporary Like Kind Exchange Relief
The like kind exchange provisions under Code section 1031 require taxpayers to take certain actions within 45 and 180 days after the taxpayer’s property has been exchanged in order for the gains to be deferred. In past disasters, the Treasury Department has deferred the completion of these actions for 120 days to allow taxpayers to first react to the disaster at hand.

March 20:

REITS Prepared for Coronavirus with Cash and Lines of Credit
REITs have prepared themselves for economic uncertainty by building up their stock of cash and cash-like assets and maintaining substantial unused lines of credit. REITs have over $28 billion in cash and nearly $120 billion in untapped lines of credit.

Hawaii State Legislature Suspended Indefinitely
On March 16, Hawaii House and Senate leadership announced that the 2020 legislative session was recessed immediately. During this time, all committee hearings and floor sessions are cancelled. Legislators are being asked to work remotely and continue with constituent work. Prior to the March 16 announcement, SB 2697 SD1, which would temporarily suspend the DPD by REITs, was awaiting a decision by the House Economic Development and Business Committee on March 18.

March 19:

100% of Nareit Survey Respondents Encouraging or Requiring Work from Home
According to the survey, more than 90% of respondents have either changed or plan to change their travel policies, more than 90% have changed or plan to change their conference attendance policies, over half are taking action to ensure business continuity, and all the respondents are either encouraging employees not required to be on-site to work from home or requiring work from home.

Nareit Asks Treasury to Allow Public REITs to Use 90% Stock to Satisfy Their Distribution Requirement
In order to once again provide publicly offered REITs with the flexibility to retain more capital during the current crisis, Nareit requested the Treasury Department to issue new guidance reverting back to a 90%/10% mix for 2020 and 2021.

March 18:

Pain Points in the Coronavirus Crisis
Stock market declines due to the coronavirus crisis are in the headlines, but the main risks in the weeks ahead are elsewhere: in cash flows and liquidity shocks; resiliency of the financial system; and impact on economic fundamentals.

Podcast: Prologis Sees Structural Changes to Logistics Real Estate in Wake of Coronavirus
Chris Caton, global head of strategy and analytics at Prologis, Inc., discusses the impact of COVID-19 on the warehouse and logistics industry. Caton pointed out that logistics real estate has benefited from historic low vacancy rates and strong demand and disciplined supply. Potential customers who have had a difficult time securing space up until now may see that situation change, he said. Investors, meanwhile, are likely to recognize “the relative beneficial attributes of logistics real estate in terms of the long-term demand drivers against other categories that have more uncertainty,” Caton said.

Nareit Coronavirus Second Round Survey Results
Nareit surveyed its membership about operational changes and preparations related to the coronavirus. Thirty-seven REITs (representing most property sectors and more than $220 billion in equity market cap) responded to the survey between March 16 and March 17.

March 17:

What Real Estate Sectors Has The Coronavirus Affected?
The spread of the coronavirus throughout the United States, and efforts to slow that spread, have caused an unprecedented sudden stop to business and consumer activities across the country. Global stock markets have fallen sharply in anticipation of lost revenues and falling asset values. Share prices of REITs moved down as well. Different property sectors face different exposures to the crisis, however, and REIT returns reflect those differences.

March 13:

Podcast: REITs’ Long-Term Leases Provide Some Stability During a Period of Market Turmoil
In the latest edition of the Nareit REIT Report podcast, Nareit senior economist Calvin Schnure highlighted the latest developments surrounding the impact of the coronavirus pandemic on the economy and REITs. Unlike previous market disruptions, such as weather events, “the cause of the (current) disruption is probably going to be a bit longer-lasting, so this could be more severe than what we’ve seen with an earthquake or hurricane. It’s also national and global in scale,” Schnure said.

Coronavirus and the Economy: The Impact Spreads
The advance of the coronavirus within the United States has prompted a corresponding spread of actions aimed at slowing the pandemic. This includes cancellation of many public activities, including sporting events, Broadway shows, schools and colleges and more. As we discussed in a commentary last week, we had anticipated these types of activities would be among those first affected by the health crisis. The new travel ban on travel and some trade from Europe will almost certainly amplify the impact on economic activity.

March 5:

The Coronavirus, Commercial Real Estate and REITs

The coronavirus crisis is rapidly evolving and there is a great deal of uncertainty about the extent and severity. First and foremost, this is a public health issue threatening the health and possibly lives of many people. It is becoming increasingly clear, however, that the disruptions caused by the epidemic will have an impact on economic activity and asset valuations.

Until recently, most of the economic concerns were about activities outside the United States: cruise ships, other travel, the global supply chain and shortages of critical components made in factories in China. With the discovery of infections in several states in this country, however, it appears inevitable that there will be more extensive disruptions and economic losses within the U.S.

To gauge the impact on the U.S. economy and commercial real estate and REITs, it is important to keep in mind the distinction between spending and investment that may be delayed but will take place later, versus spending and investment that is cancelled completely.

We have not faced a crisis like the coronavirus epidemic before, but there have been events like hurricanes, earthquakes, and large-scale labor strikes that caused large but temporary delays in economic activity. Most of these events were followed by a rebound. If the spread of the virus can be slowed, we may see a repeat of the “V-shaped” recovery from the past.

A more severe spread of the disease could cause factory closings, businesses shut down, and a more damaging impact on economic activity. Service businesses, including hotels, airlines, restaurants and movie theaters would feel some of the worst effects. Among REITs, this could affect the lodging and resort sector and regional malls.

Other sectors, however, may feel less of an impact due to their long-term leases. An apartment REIT with low vacancy rates will still have their tenants paying rent, and may not suffer any lost income. Similarly, an office REIT with investment grade tenants is not likely to experience a drop in occupancy or rent receipts. Indeed, if a desire to avoid crowded areas leads more people to do their shopping online, the industrial REITs that operate logistics facilities for shipment of goods bought on the Internet may gain some business.

It is still too soon to tell what scenario is most likely. For now, though, it is important to note that the U.S. economy, with low unemployment, robust job growth and rising incomes, and the commercial real estate sector, with low vacancy rates and rising rents, are about as well-positioned as possible to handle such a shock.

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The Market Commentary blog on presents analysis of the macro- and micro-economic fundamentals impacting the REIT and commercial real estate industry. The Nareit economics team offers their commentary on the state of the market, the outlook for commercial real estate and breaking macroeconomic news. The opinions set forth here are solely those of its author(s), and do not necessarily reflect the views of the Nareit or its membership. For more, see our Terms of Use.